The Volume Clock: Insights into the High-Frequency Paradigm

David Easley, Marcos López de Prado and Maureen O’Hara

Legend has it that Nathan Mayer Rothschild used racing pigeons to front-run his competitors and trade on the news of Napoleon’s defeat at Waterloo a full day ahead of His Majesty’s official messengers (Gray and Aspey 2004). Whether this story is true or not, it is unquestionable that there have always been faster traders. Leinweber (2009) relates many instances in which technological breakthroughs have been used to most investors’ disadvantage. The telegraph gave an enormous edge to some investors over others in the 1850s, perhaps to a greater extent than the advantages enjoyed today by high-frequency traders. The same could be said, for example, of telephone traders in the 1870s, radio traders in the 1910s, screen traders in the 1980s. Some traders have always been much faster than others, so what is new this time around? If there is something truly novel about high-frequency trading (HFT), it cannot only be speed.

And yet, high-frequency traders have been characterised as “cheetah traders”, an uncomplimentary allusion to their speed and character. The reality is, as usual, more complex. Today’s high-frequency markets are not the old low-frequency markets on steroids. To be sure